Offshoring, globalization, and welfare

•We model endogenous offshoring.•Offshoring occurs and evolves in a bell-shaped pattern.•A fall in offshoring costs benefits the high-wage country but hurts the other.•Trade liberalization and ICT improvement have different policy implications.

We investigate the issue of offshoring in a general-equilibrium model of two countries and one sector of increasing returns to scale. Our model uncovers that offshoring occurs and endogenously evolves in a bell-shaped pattern when trade costs decline, explaining some stylized facts in developed countries. Furthermore, this simple framework can be applied to examine the welfare issue. We find that a fall in offshoring costs benefits the high-wage country but hurts the low-wage country. On the other hand, the low-wage country benefits with trade liberalization. The impact of falling trade costs on the welfare of the high-wage country depends on the values of offshoring freeness.